01 Jan 2009

The need to revisit microfinance

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As part of my activities among the NGO community in Luxembourg, I had the chance to invite Franck Renaudin, founder and executive director of the French microfinance operator “Entrepreneurs du Monde“.

The NGO “Entrepreneurs du Monde” qualify themselves as an incubator of MFIs (Microfinance Institution). They provide the “seed capital” and the technical assistance required at the very early-stage of a microfinance venture and stay on board until the venture has transformed into a self-sufficient MFI.

During his visit, Franck Renaudin gave key-pieces of information about the microfinance sector, being in my opinion all the more valuable that they come from the side of the “operations” we know less (what is really happening on the field).

I give you here some highlights that may inspire us in our reflections on how to boost this area of investment and the role of the Lxbg place at the same time :

  • microfinance reaches around 150 millions recipients in the world (figure commonly approuved in the sector)
  • potential of 1,5 billion recipients worldwide – as already predicted – is considered unrealistic, as it would mean the entire world population indirectly benefits from the microfinance, … if we take an average of 4 individuals per family, as an hypothesis
  • almost all inhabitants of big cities in the developing countries are served (or have the possibility to be served) by microfinance. In other words, every urban area is already provided with a (generally multiple) microfinance offer. Potential to growth is then relatively limited in this area
  • on the opposite, needs are still broadly under-covered in rural areas (mainly due to higher costs of operations resulting from physical distances)
  • the potential of growth in rural area could be estimated to 300 to 400 billions beneficiaries worldwide

Main challenges in remote areas are :

  • the much lower range of average credits amounts resulting from higher poverty levels (from 15 € to some hundreds of €) against urban areas (200 € to some thousands of €).
  • higher costs of technical assistance (mainly via training of staff and borrowers) due to higher rates of illiteracy and usually a lower education of the communities

Among the positive aspects, it should be mentionned the small number of microfinance actors operating in rural areas, resulting in :

  • few competition on the prices- few risk of “over-indebtedness” of the families (due to the lack in microfinance offer and operators)
  • as a result, the portfolio at risk tends to be lower than those in urban areas.

According to Franck Renaudin, the concept and definition of microfinance is becoming growingly confusing in the public opinion and consequently for the investors.
MIVs are investing all on the first 100 MFIs of the world (Tier 1). They target already well established institutions in urban areas mostly, resulting consequently in a drying out of the international financial flows for MFIs in their start-up or even intermediary phase of growth who operate mostly in suburban and/or rural areas.

With a steady growth over the last years, the top 100 MFIs are frequently subject of being accused to turn more or less into commercial banks. The border is probably not so easy to put between, and it should be raised to investor’s awareness.

As a conclusion, there might be today a financial risk of concentration while going slightly away of the original microfinance purpose. Efforts to revisit the concept of microfinance while diversifying the investment opportunities might be the next step to consider.

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